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The Bruce Column — Europe transformed: The long-term effect of IFRS

Jul 15, 2015

The European Commission has underlined the transformation of financial reporting brought about since the historic 2002 decision to make IFRS mandatory in Europe. Our regular, resident columnist, Robert Bruce explains the significance of the decision and looks at how the world is changing.

Back in 2002 the EU was the first major group of nations to adopt IFRS, and its aim was straightforward. The objective of the adoption was "to harmonise the financial reporting of listed companies by ensuring a high degree of transparency and comparability of their financial statements in order to enhance the efficient functioning of EU capital markets and of the internal market." And now an extensive process of assessing whether IFRS has indeed done what Europe had hoped it would do back in 2002 has resulted in a comprehensive thumbs-up. The gamble has paid off. This decision, as one insider to the process remarked, was ‘a game-changer for IFRS around the world’. Michel Prada, the chairman of the IFRS Foundation Trustees, speaking at a Paris conference just a few days after the EC decision said that "Europe’s leadership in international finance reporting has been fully vindicated."

And at another conference following on from the publication of the report Valérie Ledure, EC acting head of the financial reporting unit, DGFISMA, reported in Riga that the use of IFRS had brought greater transparency, had been successful at creating a common accounting language, had improved accounting quality and disclosure and had led to greater comparability between financial statements. Her conclusion was that "By and large the experience of IFRS has been a positive one for Europe."

The report itself emphasised the linkage between the use of IFRSs and other initiatives, including the Transparency Directive and better enforcement, the long-term effects of the IFRS regime, and the resulting change. It found that the regulation adopted back in 2002 "has increased the transparency of financial statements through improved accounting quality and disclosure and greater value-relevance of reporting, leading to more accurate market expectations including analysts’ forecasts." It said that "It also led to greater comparability between financial statements." There were "improved capital market outcomes," including "higher liquidity, lower costs of capital, increased cross-border transactions, easier access to capital at EU and global level, improved investor protection and maintenance of investor confidence."

But the report, while drawing attention to the long-term value and the effect of IFRS across Europe has highlighted that US is yet to join with Europe and much of the rest of the world in global harmony. The original goal of achieving a level playing field with the US has not happened, although much convergence has been achieved. The “equivalence” arrangement whereby the US Securities and Exchange Commission accepts without reconciliation to US GAAP financial statements prepared under IFRS for foreign companies is seen as "an important benefit for around 90 large EU issuers with US listings." The EC report recalls that the European initiative in 2002 to make IFRS mandatory across Europe "envisaged IFRS becoming global standards which would benefit EU companies." And Valérie Ledure made it very clear in Riga that they "continue to urge the US SEC to adopt IFRS for use by its domestic companies."

James Schnurr, the SEC’s chief accountant, recently stressed that "there is continued support for the objectives of a single set of high-quality, globally accepted accounting standards," but it is clear there is no appetite amongst ordinary domestic US companies for IFRS.

Realistically, as the EC report and other developments around the world show, the SEC’s position is less central to the work of the IASB than it once was. It was the rest of the world that Michel Prada chose to focus on in his Paris speech. "India has recently decided to adopt standards that are very close to IFRS and is on the right track," he said, "while in Japan we have seen an ever-increasing number of Japanese companies choose to adopt IFRS." In fact over 100 have chosen to do so, encouraged, as he pointed out, "by Japanese authorities." Chinese accounting standards, he said, "are substantially converged with IFRS, while Hong Kong has been fully IFRS-compliant for as long as Europe has been." The fact that the IFRS Foundation trustees are meeting in Beijing this autumn is expected to maintain the momentum.

But, as Prada said, "The situation in the US is more complex, and somewhat unique to the US." By this he meant that although there was little sign of practical progress the theory was all in place. "It is easy to forget that the US Securities and Exchange Commission has been a long-time supporter of our work," he said, "and today oversees the IFRS-complaint financial statements of almost 500 Foreign Private Issuers, foreign companies listed in the US, making it one of the largest IFRS overseers in the world."

His conclusion was that the US would eventually join up. "In the meantime," he said, "we will keep the door open and continue to work with the relevant stakeholders in the US." With so much rapid progress to deal with around the globe that is a sensible strategy. Europe and the rest of the world are making the running. And the European Commission report makes the foundations firmer. No wonder that Michel Prada was singing its praises in Paris. "This is a very important report," he said, "because it makes clear, without ambiguity and in an evidence-based manner, that IFRS has been a good thing for Europe, for European companies and for European investors."

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